In re Vadnais Lumber Supply, Inc.
| Decision Date | 24 May 1989 |
| Docket Number | Adv. No. 88-4056.,Bankruptcy No. 88-40487-JFQ |
| Citation | 100 BR 127 |
| Parties | In re VADNAIS LUMBER SUPPLY, INC. d/b/a Churchill Forest Products d/b/a Industrial Forest Products, Debtor. VADNAIS LUMBER SUPPLY, INC. d/b/a Churchill Forest Products d/b/a Industrial Forest Products, Plaintiff, v. James P. BYRNE, James Kaveny, a/k/a James Kaveney, Edward T. Mis, Jr., Andrew F. Sears, Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
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Joseph Reinhardt, Hendel, Collins & Newton, Springfield, Mass., for Vadnais Lumber Supply Inc., debtor, plaintiff.
William Murray, Murray, Fitzgerald, Sabella & Donahue, West Springfield, Mass., for James P. Byrne, James Kaveny, Edward T. Miss, Jr. & Andrew F. Sears, defendants.
This litigation follows in the wake of a leveraged buyout of Vadnais Lumber Supply, Inc., the debtor in this Chapter 11 proceeding (the "Debtor"). It is apparently a case of first impression concerning the fraudulent transfer consequences of stock redemptions accompanied by noncompetitive covenants to which separate considerations have been allocated. Also presented are questions under preference law of business valuation in determination of insolvency and application of the so-called "earmarking" doctrine. We set forth here completely amended findings of fact and rulings of law pursuant to motions filed by the parties to amend prior judgments and the findings and rulings thereunder.
The Debtor is in the business of selling lumber to contractors for use in construction and to industrial concerns for use in operations or the maintenance of property. For several years prior to the events in question ownership of its outstanding capital stock was equally divided among the following five individuals: David C. Derby, Andrew F. Sears, James Kaveny, Edward T. Mis, Jr. and James P. Byrne. The defendant Sears was president, the other defendants were vice-presidents, and Derby, who is not a defendant, was treasurer; all served as directors. All were employed by the Debtor on a full-time basis. Sears managed the office in Springfield, Massachusetts and oversaw operations at the Debtor's Hanson, Massachusetts location. Kaveny was in charge of sales in Massachusetts and parts of Vermont and New Hampshire, as well as overseeing the Debtor's operations in Bellingham, Massachusetts. Mis was in charge of sales in Connecticut. Byrne managed the Debtor's industrial forest products division, which handled sales of high quality maple and particle board for cabinets. (The so-called "Vadnais division" made sales of other products). Derby's duties were primarily financial. The Debtor's main office was in Springfield; its sales area included all of Massachusetts, Connecticut and Rhode Island, as well as the eastern portion of New York and the lower portions of Vermont and New Hampshire.
During 1987 a rift developed among the five stockholders over matters not pertinent here. In 1987 the Debtor also began to sustain operating losses due to uncontrolled growth. The five stockholders split into two camps, with Derby in one and his four co-stockholders in the other. Derby's duties were changed, and the others began casting about for a way either to buy him out or sell to a third party. In November 1987 Lawrence and Patrick O'Toole, two brothers who had previously held a major stock interest in the Debtor, offered in writing to purchase all the company's assets and related business real estate owned by the stockholders for $500,000 and the assumption of all liabilities. That offer was not accepted.
Soon thereafter, the parties worked out an arrangement whereby Derby would stay with the company and the other four would sell. On December 7, 1987 the five stockholders and the company signed an agreement (the "Sales Agreement") containing these features: (i) the sale to the Debtor of the eighty percent stock interest held by the four defendant stockholders at a price of $100,000, of which $20,000 was paid immediately and $80,000 was payable at the closing scheduled in January; (ii) the agreement of the selling stockholders that for one year after the closing they would not sell to certain customers of the Debtor in some but not all of its product lines, for a consideration of $300,000 payable $100,000 at the closing and $200,000 in 17 equal monthly installments commencing March 1, 1988 and continuing through July 1, 1989; (iii) payment by the Debtor at the closing of its entire debt to the selling stockholders for loans and expense reimbursement, totalling over $300,000; (iv) the sale to Derby, for a stated consideration of one dollar, of the sellers' eighty percent interest in the parties' two partnerships which owned real estate occupied by the Debtor; (v) Derby's commitment to arrange financing for the foregoing by agreeing to make a $22,000 capital contribution and "put into" the Debtor the required balance. The Sales Agreement further provided that Derby was to become the company's chief executive officer immediately rather than after the closing. The sellers signed written resignations from their posts as officers and directors which were delivered in escrow to become effective upon completion of the closing.
Derby thereafter obtained the required financing through personal loans. He made the stipulated $22,000 capital contribution. At the closing held on January 19, 1988, Derby advanced the necessary additional funds as loans to the Debtor; the defendants received the sums then due them under the Sales Agreement either in cash furnished by Derby or in inventory, receivables or customer accounts transferred to them by the Debtor at agreed values. All four of the defendants then went into the lumber business in the Springfield area in competition with the Debtor, as permitted by the limited noncompetitive convenants in the Sales Agreement. Sears, Mis and Kaveny formed New England Lumber Specialties, Inc. Byrne formed Prime Plywood and Panel, Inc. Mis also conducted sales activities in unincorporated form under the name Lumber Specialty Products. These activities of Mis were initially confined to servicing one account, Northeast Nuclear Co., which he purchased from the Debtor at the closing for $37,000 applied as a credit against the Debtor's obligation to him under his noncompetitive covenant.
After the closing Derby attempted to perform the duties previously discharged by all five of the stockholders. Although Derby is capable, the Debtor suffered from loss of the management and sales talents of the four defendants. Other troubles afflicted the Debtor, and on August 11, 1988 it filed a petition in this Court seeking to reorganize under Chapter 11. This adversary proceeding followed. The Debtor has since placed in escrow with its attorney all monthly payments for the noncompetitive covenants of Sears, Byrne and Kaveny as they became due. It has made no payments for Mis's covenant since March 1988.
The foregoing sets forth the factual situation in general outline. Further findings are contained in discussion of the legal issues.
The Debtor's indebtedness of over $300,000 to the defendants for loans and expense reimbursement was discharged at the closing or shortly thereafter through a combination of cash payments and property transfers. The following loans were discharged at the closing: Sears—$92,031.24; Mis—$68,340.92; Byrne—$21,137.37; Kaveny—$127,602.34. On or about February 14, 1987 the Debtor paid these debts owed the defendants for expense reimbursement: Sears—$409.00; Mis—$4,205.78; Kaveny—$1,132.40; Byrne—$1,759.00. The Debtor seeks to avoid all of these transactions as preferences under § 547 of the Bankruptcy Code, 11 U.S.C.S. § 547 (Law.Co-op.1986 & Supp.1988). We deal only with the issues under § 547 which have been argued by the parties.
Transfers to creditors made outside the 90 day prepetition period but within one year of the petition filing date are avoidable as preferences only if the recipient is an "insider" of the debtor "at the time of such transfer." § 547(b)(4)(B). An insider of a corporate debtor is defined to include an officer or director or one in "control" of the debtor, "control" being an undefined term. § 101(30).
The defendants were insiders at the time of all these payments. First, they were still officers and directors at the closing. Although they had signed written resignations on December 7th, the resignations were held in escrow in order not to be effective until completion of the closing. Second, the defendants were in control at the closing by reason of their eighty percent stock interest and the offices which they held. That control, furthermore, continued with respect to the small expense reimbursements made thereafter, even though the resignations were then effective and the stock sales had been completed. The payments received after the closing were made pursuant to the written agreement of December 7th when the defendants were in control. Payments made after technical control ceases, but committed to while it exists, present the same potential for abuse posed by payments to parties then in control. The fact of control prompts the payment and its timing in both situations. There should be no difference between them where, as here, the contractual commitment is made during the one year period.
To be voidable under § 547 the transfer or obligation must occur while the debtor is insolvent. A business entity is insolvent within the meaning of the Bankruptcy Code if "the sum of such entity's debts is greater than all of such entity's property, at a fair valuation . . ." § 101(31)(A). The defendants contend that the Debtor was solvent at the time of the payments, relying upon the O'Toole offer and deprecating the Debtor's recent losses as being the result of two factors not present after the closing—friction...
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